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Maximizing the “Impact” | by Kristen Pue

When we think of finance, we often conjure images of selfishness: endlessly rapacious Gordon Gekko types dressed in tailored suits and with $500 haircuts. But finance can also be used for social good – indeed, social finance has emerged as a complement to traditional giving and is already helping many people. But how can governments facilitate social finance so that it can do the most good for the greatest number of people?

On 15 September leading Canadian experts and practitioners in Canada’s social innovation sector gathered at the Toronto Stock Exchange for the launch of the outcome report of the Canadian National Advisory Board to the G7 Social Impact Investment Taskforce, Mobilizing Private Capital for Public Good: Priorities for Canada. This report was launched as one of eight nation-specific complements to the G7 Social Impact Investment Taskforce’s main report, Impact Investment: the Invisible Heart of Markets, which was also released on 15 September. It drew from the experiences of charities, industry, investors, philanthropists, financial intermediaries, and government officials to recommend what the Canadian government could do to enable the most private capital to do the most public good through social finance.

The Canadian National Advisory Board had three main recommendations for the government. The lowest level of ambition entails simply doing no harm by updating the laws to ensure a regulatory environment that allows social impact investment. A slightly higher level of support could involve the government catalyzing further social impact investment through a variety of incentives. Finally, the government could actually offer projects for social impact investment through creating an outcomes payment fund.

Recommendation 1: Do No Harm

Social finance and other types of social innovation have created a new situation in which the line between a charity and a business is less clear and, as the Canadian National Advisory Board Chair Ilse Treurnicht has noted, “policy frameworks are straining in this new hybrid environment.” Canadian rules need to be changed to reflect the changing environment of philanthropy. As such, the National Advisory Board recommended that the Income Tax Act be updated so that it enables impact investment and social entrepreneurship.

The most important change to be made is this: foundations should be allowed to invest in limited partnerships. In theory, Canadian foundations have as much as $46 billion that could be used in social impact investing, but they have been hesitant to do so. One of the big reasons for this is that charities are not allowed to invest in limited partnerships, which is the legal form that many social impact investments take. This rule emerged because investors in limited partnerships are deemed as owners of that business and charities cannot be businesses. So, even though foundations typically invest their endowments in the private sector to grow the pool of money that they can distribute as grants, they can’t invest in certain kinds of socially beneficial investments because of this rule.

Recommendation 2: Provide Catalytic Capital

Social impact investing has thus far been limited, in part, because it is so new: there are few financial products available; the ones that are available seem risky because there is very little track record; and initial costs are high for trailblazing products which don’t yet have best practices on which to rely. To overcome this initial hump, governments can help to catalyze the growth of social impact investing. The report recommended that the government establish an investment matching program, where government would match social impact investments made by the private sector, or provide other incentives to reduce risk, such as credit enhancements, partial guarantees on investments, and tax advantages.

Recommendation 3: Directly Engage, through an Outcomes Payment Fund

Some government departments around the world have been directly involved in social impact investment through social impact bond projects. Saskatchewan’s Sweet Dreams social impact bond is the first such project in Canada, but many other provinces have plans in the works. This is one way for the government to directly participate in social impact investment project.

To directly engage in social impact investment, the National Advisory Board recommended establishing an outcomes payment fund, in which the government would set prices that it would pay per social outcome attained. This recommendation is based on the United Kingdom’s unit cost database, which outlines the cost to the government of various social challenges, such as: the cost to the government of alcohol dependency per person per year, the cost of a child taken into state care per year, the annual cost to the state per homeless person or the cost to the police per incident of domestic violence. The UK’s unit cost database focuses only on the cost to government, which arguably is problematic because it presents poor people as “users” of government services. However, a Canadian outcomes payment fund could take a more inclusive approach to addressing poverty by emphasizing the value of individual improvements in quality of life and the amount that government is willing to pay for this.

By setting a guaranteed price for specific improved social outcomes, government would in essence provide a market for social impact investment. Investors and service providers would be able to identify an outcome that they could attain, compare the expected cost of attaining this outcome with the price that government is willing to pay and, if it is deemed profitable, approach the government with the project.

Conclusions

Social finance is increasingly used to complement traditional giving and already accounts for as much as $290 million in Canada. This is just the beginning: if the Canadian National Advisory Board’s recommendations on social impact investment are adopted, social finance could grow to help many more people around the world. At the very least, the government should update its Income Tax Act to remove barriers to impact investing. But it could also enable social impact investment through catalytic capital and the establishment of an outcomes payment fund.